SEC, Feds charge senior GPB executives with fraud

The Securities and Exchange Commission on Thursday charged senior executives at GPB Capital with fraud and running a Ponzi-like scheme that raised over $1.8 billion from 17,000.

GPB raised $1.8 billion from investors starting in 2013 through sales of private partnerships, but it has not paid investors steady returns, called distributions, since 2018. More than 60 broker-dealers partnered with GPB to sell the private placements and charged customers charged clients commissions of up to 8%.

Also on Thursday, the Justice Department unsealed a criminal indictment in the Eastern District of New York charging three GPB executives, David Gentile, Jeffrey Schneider and Jeffrey Lash with securities fraud, wire fraud and conspiracy.

Several states, including Alabama, New Jersey, and New York said this morning that they filed parallel civil lawsuits to the SEC's complaint.

"GPB has been cooperating with government investigations and is extremely disappointed by these developments," the company said in a statement. "GPB denies these allegations and intends to vigorously defend itself in court where, for the first time, the firm will be able to present significant evidence in its favor."

The company announced Gentile was stepping down as CEO “until current matters are resolved,” with CFO Rob Chmiel getting tapped to be interim chief executive.

Gentile, the owner and CEO of GPB Capital, and Schneider, the owner of GPB Capital’s placement agent Ascendant Capital, lied to investors about the source of money used to make an 8% annualized distribution payment to investors, according to the SEC's complaint. Lash was a former managing partner at GPB.

Those executives, using the marketing broker-dealer Ascendant Alternative Strategies, told investors that the distribution payments were paid exclusively with monies generated by GPB Capital’s portfolio companies, the SEC alleged.

As alleged, GPB Capital actually used investor money to pay portions of the annualized 8% distribution payments, fitting the definition of a Ponzi scheme.

According to the SEC, GPB Capital and Gentile, with assistance from Lash, also allegedly manipulated the financial statements of certain limited partnership funds managed by GPB Capital to perpetuate the deception. Those financial statements gave the false appearance that the funds’ income was closer to generating sufficient income to cover the distribution payments than it actually was, the complaint alleges.

The SEC’s complaint further alleges that GPB Capital and Ascendant Capital made misrepresentations to investors about millions of dollars in fees and other compensation received by Gentile and Schneider. 

The scheme allegedly continued for more than four years in part because GPB Capital kept investors in the dark about the limited partnership funds’ true financial condition, according to the SEC, and failing to deliver audited financial statements and register two of its funds with the Commission. 

In a first last week, a broker-dealer that sold private placements managed by GPB Capital lost a $515,000 arbitration claim to customers that included all client legal fees, an unusual distinction in such claims.

GPB said on Friday afternoon that Gentile was stepping down as CEO “until current matters are resolved,” with CFO Rob Chmiel getting tapped to be interim chief executive.

TIMELINE

2013 — GPB Capital, the brainchild of accountant David Gentile and brokerage executive Jeffrey Schneider, starts selling and raising money for high-yield private placements to buy auto dealerships and trash hauling businesses. It is incredibly successful in marketing, ultimately raising $1.8 billion from thousands of retail investors and selling product through a network of more than 60 broker-dealers.

July 2017 — In a first sign of trouble, GPB sues a former business partner over control of auto dealerships and causing genuine concern among broker-dealer executives who gave the OK to GPB private placements.

April 2018 — GPB misses a key deadline to file financial statements with the Securities and Exchange Commission, the first public exposure of potential shortcomings of financial controls. It then stops paying many investors distributions, which are akin to dividends, raising more concern. That August, it halted sales to review its accounting, only to have its auditor later drop the company and leaving investors and advisers in the dark.

February 2019 — The FBI raids GPB offices in New York. InvestmentNews had earlier reported that the Securities and Exchange Commission was investigating the firm.

October 2019 — The Justice Department charges GPB compliance chief Michael Cohn with obstruction of justice. He later pleads guilty eleven months later to a misdemeanor.

February 2021 — The Justice Department and the SEC charge Gentile, Schneider and managing partner Jeffrey Lash with a number of fraud charges, including creating a Ponzi-like scheme and securities fraud, wire fraud and conspiracy. Executive were charged with lying to investors about sources of money to make annual distributions of 8%. The company claimed the distribution were paid for with returns on investments but actually used investors’ own money to make the payments.

Internal communications between Gentile, Schneider and Lash allegedly reveal the extent to which they were aware of cash flow problems and shortfalls at the GPB funds, according to the federal indictment.

In one text message cited in the criminal indictment, Schneider wrote to lash in 2016: “We have to man up and write checks which is simply giving back dollars we already received.”